Chairman Soliday, Ranking Member Forestal, and Members of the Committee,
On behalf of National Taxpayers Union’s (NTU) Indiana members, I strongly encourage you to reject the road funding proposal under consideration. As you return to work in the General Assembly, a number of high profile issues confront you this session, perhaps none more consequential than fixing the state’s crumbling roadways. Regrettably, the proposal under consideration is ill-conceived and would not adequately address the problem.
Though most states dedicate all of the revenue generated by the gasoline tax to road repair, maintenance and construction, Indiana does not. Current law establishes that only about 15 percent of every dollar collected by the gasoline tax goes toward maintaining and upgrading the roads. Dedicating every dime of the gasoline tax revenue to transportation makes sense, but the plan before the Committee is fatally flawed.
While minor details may change, the crux of the proposal under consideration remains the same. If enacted, the package would index the gas tax to inflation and shift that revenue to the State Highway Fund. It is estimated that the gas tax would increase by 5 cents per gallon immediately and then increase with the Consumer Price Index. To offset the revenue loss to the General Fund, the proposal would hike Indiana’s cigarette tax by $1 per pack to $1.99.
There are multiple problems with this approach. The principal problem is that cigarette taxes almost always yield far less revenue than initially projected, leaving the non-partisan National Conference of State Legislatures to conclude, “cigarette taxes are not a stable source of revenue.” A 2013 study by NTU’s research arm, National Taxpayers Union Foundation, found that revenue projections were met in only 29 of 101 cases where cigarette and tobacco taxes were increased between 2001 and 2013. The same study concluded that over the same period, tobacco tax hikes were followed by other tax hikes nearly 70 percent of the time, usually after revenues failed to meet projections.
Next, cigarette taxes are highly regressive, affecting low-income earners far more than high-income earners. It is estimated that over 50 percent of adult smokers make less than 200 percent of the Federal Poverty Level. In other words, the tax hikes under consideration would hit particularly hard those Hoosiers who can least afford to pay for them.
In addition, according to a 2010 study by the National Association of Convenience Stores, tobacco sales account for over one-third of all sales at convenience stores, which are often owned and operated locally. It is unlikely that the House Roads and Transportation Committee’s goal is to raise taxes on small businesses, yet that would be the result if the General Assembly passes the plan currently under consideration.
Finally, by increasing cigarette taxes to $1.99 per pack, Indiana’s neighbors to the east and south – Ohio and Kentucky – would each have lower cigarette taxes, even accounting for Ohio’s 2015 cigarette tax hike. This creates an incentive for black market purchases or cross-border sales of tobacco products.
NTU fully appreciates the budgetary difficulties facing the General Assembly. Indiana truly needs a long term solution to road repair and construction, but the plan under consideration is rife with ill-conceived funding mechanisms and is not worthy of your support.
Policy and Government Affairs Manager